Dividend Distribution Tax, before and after Union Budget 2020
This note discusses how abolition of DDT impacts your taxes
The DDT was introduced by the Finance Act, 1997 by which dividend distributed by a domestic company became subject to tax in the hands of the company distributing the dividend in the form of DDT and accordingly the dividend received was made exempt in the hands of the shareholders. Several changes have been made since its introduction e.g. changes in the rate of tax, grossing up, provisions to remove the cascading effect of dividends received from subsidiaries and to tax dividends earned in excess of Rs 10 lakh (Rs 1 million) from domestic companies etc.
A. Existing Provisions:
a. In the hands of Domestic Company
Dividend distributed by a domestic company is defined under section 2(22) of the Income Tax Act, 1961 (the “Act”). Tax on such dividend is levied u/s 115 O of the Act which provides:
- Tax @ 15% plus surcharge plus cess on the profit distributed by the company in case of dividend referred u/s 2(22)(a), 2(22)(b), 2(22)(c) and 2(22)(d)
- Tax @ 30% plus surcharge plus cess on the profit distributed by the company in case of dividend referred u/s 2(22) e.
b. In the hands of Shareholder
- Dividend received from domestic Company, in excess of Rs. 10 Lacs (Rs 1 million) by Resident Individuals, HUF, AOP or BOI is taxable @ 10% u/s 115BBDA
- Dividend received from domestic company in all other cases is exempt u/s 10(34)
- Dividend received from a foreign company is taxable @15% u/s 115BBD
B. Proposed amendment by the Union Budget 2020
The Union Budget 2020 proposed to remove the DDT which is covered u/s 115O and adopt the classical system of dividend taxation under which a company paying the dividend will not have to pay DDT but the dividend so received will be taxable in the hands of shareholders at their applicable tax slab rates.
Further, in case of domestic companies, a deduction will be allowed against dividend received from another domestic company provided the receiving company has distributed dividend equal to the dividend received before the due date.
Effects of the Amendment:
a. Dividend, in true sense, is income of the shareholders. While earlier provision of taxing it in the hands of the company was beneficial for the investors whose taxable income falls under the applicable tax slab rate of greater than 20%, it was not in the interest of shareholders having income in the lower applicable tax slab rates. The amendment seeks to tax it at the actual applicable rate of tax which is more equitable.
b. The tax treaties entered by India with various countries, largely limit taxation on dividends in India at 10% and a shareholder has the ability to claim credit for the tax deducted in India, in its country of residence. However, in existing scenario, non-resident investors were not able to claim rebate under the provisions of DTAA against the tax deposited by a domestic company on dividend u/s 115O as the income in the hand of shareholder was tax exempt. Such shareholders faced challenges in claiming credit for DDT in their home country which typically resulted in high tax cost for foreign shareholders. In a relief to such investors who are resident in countries having a Double Tax Avoidance Agreement (DTAA) with India, there is a possibility, depending on the provisions of the DTAA, to claim tax rebate on the amount of tax paid on such income in India.
c. Post this amendment, non-resident shareholders would be in a position to restrict tax liability on dividend in accordance with the provisions of the applicable DTAA.
Dividend, as defined u/s 2(22) of the Income Tax Act:
2(22)(a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company;
2(22)(b) any distribution to its shareholders by a company of debentures, debenture-stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not;
2(22)(c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not;
2(22)(d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not;
2(22)(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent. of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.
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